Local Currency as part of an economic transformation package.

By Lowell Manning manning@kapiti.co.nz

Plan Outline

This local currency plan is based on widely accepted concepts:

1. Truly sustainable development occurs from the bottom up
2. Local communities can best put local people to work using local resources
3. It is better to contribute to society at a basic level than not contribute at all
4. Financial leakage from local communities is to be avoided and local reinvesment of local savings encouraged.

The plan has 5 distinct parts:

1. Officially encourage, assist and promote the development of local currency schemes nationwide
2. Provide professional backup, organisational and management training, and assistance with equipment, software and stationery
3. Introduce upskilling and training courses inside the schemes
4. Encourage local authority participation by accepting some rates payment in local currencies
5. Introduce a NZ$ tax on local currency transactions

Plan Implementation

Implementation of the parts can overlap.

Over 5 years, target participation could be 25% of the working age population, 50% of businesses and 100% of schools and territorial authorities (Councils).

After 5 years, the global cost of this project in New Zealand is around NZ$ 92 million/year. Estimated revenue with a 10% NZ$ transactions tax applied to local currency activity is about NZ$180 million/year. Local currency transactions will be about NZ$1.8 billion/year.

The purposes of collecting NZ$ tax on local currency transactions are to make the proposal politically and publicly attractive and allow the economic activity to be added to GDP while maintaining an accounting balance. Local currency taxes can be substituted for NZ$ tax once the proposal is widely accepted. Local currency tax would be used for redistribution and development within the local currency groups.

The local currency proposal is best introduced in conjunction with tax reform, greater use of interest-free money, and payment of a universal basic income, though it will also work as a stand alone project.

Step 1

Participation could be based on local school areas (up to about 2000 population) with provision for balanced inter-group trading within larger territorial authority areas. Each group would be professionally administered. LETS style local currency, self-generated and cancelled, has been assumed in the example, though the proposal would work just as well with other local currency systems.

Step 2

Each group will have its own professional administrator and office and nationally prepared brochures, handbooks and stationery. In addition, each territorial area will have a central processing centre. The centre is needed to administer inter-group trading and taxation.

Step 3

Upskilling and training courses can be created within local currency groups, but will more probably be generated as regional or national programmes. Local trainers paid in local currency can deliver the programmes, but external trainers may be needed to "train the trainers". The external trainers would be government funded.

Step 4

The single most important boost for local currencies is to make them acceptable for taxes.

Local Councils would become members of the district-wide local currency group and would accept some rates in local currency. To begin with, this might be a maximum of, say, 25% of the member's total rates. Using local currency, Councils can avoid NZ$ rates increases while continuing to expand their range of services. The local currency rates facility might be quite small to begin with (perhaps just 1 or 2 % of the Council's total rates).

The Council buys goods and services in the usual way and issues a public service receipt for them (psr). The seller deposits the psr at the local currency processing centre. The agreed payment is debited against the Council rates account and credited to the sellers account (on which the seller's total rates have been recorded). The processing centre checks the total rates credit to date does not exceed the individual maximum. Amounts above the individual maximum are credited to the seller's ordinary local currency account. The processing centre forwards a rates credit advice to the council. It debits the members account and the Council deducts the credit from its periodic rates demand.

Step 5

Fairly taxing local currency activity will make it acceptable to governments, business and most people generally. It is feasible to tax within the local currency system itself, but not politically advisable in the first instance. Internal local currency taxation would allow elderly or disabled people to be given periodic credits or local currency to be recycled as interest free micro-loans to promote local investment and employment. Taxing local currency transactions in NZ$ allows the government to more than cover the project costs, making it a development programme in its own right as distinct from a handout or subsidy.

Demurrage

To keep local currency circulating, a demurrage (or negative interest) could be applied to unused credit balances. For example a 1% or 2% tax could be applied each month to credits that have been in a members account continuously for, say 2 months. Demurrage is a kind of local currency tax.

Local Currency Taxation

NZ$ tax is most readily applied as basic income is implemented. Basic income is an unconditional payment made to everyone, replacing social welfare and superannuation, and set at a level that protects existing incomes. The tax most naturally takes the form of a transactions tax. Basic income payments can be automatically deposited into a Kiwibank account set up for each person and accessed using a debit card. Conversely, NZ$ local currency taxes could be automatically deducted from the same Kiwibank account. The process is simple and almost costless.

It is important to tax local currency transactions if local currencies are to work properly in parallel with the formal economy. The tax level needs to be about the same as GST, perhaps 10% to begin with, compared with a total of about 34% in the formal economy.

Local currency taxation also enables local currency activity to be fully merged into the wider economy once other monetary and tax reforms have been implemented.

Local Currency and Basic Income

Local currency greatly assists the introduction of a basic income for all because it readily allows able bodied people of working age (18 to 65 years) to participate in the economy while keeping the overall basic income funding acceptable.

In one worked example for New Zealand, basic income entitlements are 23% of National Disposable Income. NDI is total resident income from all sources available for consumption and saving after deducting net transfers to the rest of the world. Saving is the change in inventory and gross fixed capital formation before consumption of fixed capital.

The entitlements are funded by 12.2% existing transfers, 7.6% interest-free and debt free NZ Reserve Bank credit , (replacing much of existing average annual 8.6% growth of private interest bearing bank credit), and 3.2% saving on debt servicing and administrative costs. This allows basic income to be introduced without tax increases.

The worked example is modelled on existing superannuation entitlements. In NZ, each superannuitant gets $160/week plus an accommodation allowance of $140/week shared among adults living in the household who are registered on the electoral roll at that address. People between 18 and 65 get $64/week plus accommodation allowance. Each child gets $64/week. Special allowances (like those for disability) are paid separately on a case by case basis through the appropriate government department. If the local currency activity tax rate is 10%, and the minimum wage is $7.75/hour, able bodied people are invited to participate in local currency activity for up to 14 hours/week to enjoy the same level of basic income as superannuitants. ($96x1.1/7.75), though anyone can, of course, work as much as they like without penalty. The example does not make an exception for tertiary students over 18 years of age, though it could readily do so.

If local currency activity were not included in the proposal, the basic income funding level would need to go up by another 10.5% of NDI. This would require substantial politically unpopular tax increases.